American International Group

Definition

American International Group (AIG) is a global insurance and financial services corporation that provides a wide range of products, including property-casualty insurance, life insurance, and retirement services. AIG played a pivotal role during the financial crisis of 2008, becoming one of the largest recipients of government bailouts to prevent its collapse and stabilize the economy.

5 Must Know Facts For Your Next Test

1. AIG was heavily involved in selling credit default swaps, which contributed significantly to its financial troubles during the 2008 crisis.
2. The U.S. government provided approximately $182 billion in bailouts to AIG through various programs, making it one of the most expensive bailouts in American history.
3. AIG's downfall was primarily due to risky investments in mortgage-backed securities that lost value when the housing market collapsed.
4. Following the bailout, AIG underwent a restructuring process, selling off non-core assets and refocusing on its core insurance business.
5. The bailout raised concerns about moral hazard, as it set a precedent for government intervention in the private sector to prevent failures.

Review Questions

• How did AIG's involvement in credit default swaps contribute to its downfall during the financial crisis?
  • AIG's involvement in credit default swaps exposed the company to massive potential losses when mortgage-backed securities began to fail. These financial products were meant to provide insurance against defaults on loans, but as housing prices plummeted and defaults increased, AIG found itself liable for substantial payouts. This situation led to a liquidity crisis for AIG, ultimately requiring government intervention to prevent its collapse.
• Discuss the implications of AIG's bailout on public perception of government intervention in the economy.
  • AIG's bailout significantly influenced public perception regarding government intervention. Many viewed the decision as necessary to stabilize the economy and prevent further fallout from a major financial institution's collapse. However, it also sparked outrage over the use of taxpayer money to save a company deemed 'too big to fail'. This raised ethical questions about moral hazard and whether large corporations could take reckless risks knowing they might be rescued by government funds.
• Evaluate the long-term effects of AIG's bailout on regulatory policies concerning large financial institutions in the U.S.
  • The long-term effects of AIG's bailout prompted significant changes in regulatory policies aimed at preventing similar crises in the future. In response to AIG's collapse and the broader financial crisis, legislation such as the Dodd-Frank Act was enacted to increase oversight of financial institutions, particularly those deemed 'too big to fail'. This legislation included provisions for stress testing, increased capital requirements, and measures aimed at reducing systemic risk within the financial system, fundamentally reshaping how large financial entities are regulated.

Related terms

Financial Crisis of 2008: A severe worldwide economic crisis that occurred in the late 2000s, marked by the collapse of large financial institutions, declines in consumer wealth, and significant disruptions in financial markets.

Bailout: A financial rescue provided by the government to prevent the failure of a corporation or institution deemed 'too big to fail', often involving significant taxpayer funds.

Too Big to Fail: A term used to describe financial institutions whose failure could trigger a wider economic collapse, leading to government intervention to support them.